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Bankers’ fears that their bonuses will be capped by European Union regulations have grown since it has emerged that Germany has dropped its opposition to a parliamentary proposal to restrict remuneration packages.

With the European Union on the verge of agreeing the cap, Financial News explains the key details.

1) What is the bonus cap?

Late last year MEPs and negotiators on behalf of European governments laid down proposals to curb excessive remuneration within banking.

Among their plans was a stated desire to cap bonuses for all staff at the same amount as base salaries, rising to 2:1 should a majority of shareholders agree.

There is a groundswell of political opinion in favour of a cap throughout Europe, one of the loudest proponents being the Belgian Green MEP Philippe Lamberts. Given the population-based voting weights in the European Council, the current support of large nations such as France and Germany is crucial to the success of the policy.

2) How will it be implemented?

The bonus cap proposals form part of the Capital Requirements Directive IV package, designed to effect the introduction of the Basel III provisions on capital and liquidity into law. Some market participants have criticised the inclusion of a provision on pay in the package, considering it an opportunistic addendum by politicians designed to appease a voting public that remains highly critical of remuneration in the banking sector.

Related

The bonus component of CRD IV is contained in the Capital Requirements Regulation, not the directive. While directives are binding the form and methods of their application are up to nation states. Regulations are fully binding, with no room for interpretation by member states.

Opponents of the move at the time were hopeful that this would not gain sufficient support but the UK, the key objector, is heavily outweighed in negotiations as both France and Germany are pushing for the rule to be adopted.

3) Who supports it?

It’s easier to list who isn’t in support of the cap: Just the UK, the Czech Republic and Sweden are now opposed to the plan to cap bonuses, according to Raoul Ruparel, head of economic research at the Open Europe think tank.

Approval for the CRD IV package will be necessary from both the European Parliament and the European Council, which comprises of European heads of government. Negotiations on the issue between member states and the European Parliament are due to resume today, but few expect MEPs to champion the cause of unfettered bonus payments.

The headline terms of negotiations are set by senior national and European politicians, with working groups of officials from, in this case, the finance ministries of member states tasked with thrashing out the detail. It is at this level that the differences have become clear.

The Council operates via a system of qualified majority voting, allowing a motion to be passed if member states representing 62% of the European Union’s population support it. Should just the UK, Czech Republic and Sweden oppose the plan their vote will equate to just over 16% of the Union’s population, very far from a blocking minority. Even with German support for a blocking motion the proposal would pass by a comfortable margin of six percentage points of population.

4) What is the UK argument?

While the move on bonuses was inspired by the desire to curb excessive remuneration, critics argue that the scale of bankers’ pay will not materially alter. They assert that higher base salaries will be the result, removing the link between performance and reward.

John Redwood, MP and leader of the Conservative Policy Group on Economic Competitiveness, said this “will make financial institutions less stable rather than more stable”.

In addition to removing the link between performance and pay he said curbing bonuses would means that banks can’t cut back in a hurry. “[Under the current system] you get into a crisis, profits collapse and bonuses automatically go. [The measure being proposed] means that organisations will pay far too much in basic pay. They’ll be far more geared and so when they hit a downturn they’ll be very vulnerable. It’s the economics of the madhouse.”

He also argued that the remuneration of large bonuses to bankers will just move to a different jurisdiction, so Europe will lose out on the tax benefits.

5) When will this come into effect?

CRD IV, which comprises a directive and a regulation, was expected to be implemented by the beginning of this year but is now expected by January next year. Even if this deadline is met, it could take time to take effect.

Ruparel at Open Europe said: “It needs to get approval from the Council and the Parliament. Once that’s done it will have to be implemented into national law, which means ratification by all national parliaments.”

While the UK objects to the bonus component, Ruparel believes it may not be British negotiators’ foremost priority: “There are much more important parts of CRD IV that the UK disagrees with, so they could give some leeway on this to gain ground in other areas. The UK is not in favour of maximum harmonisation of the headline capital requirements for example.”